HMOs Are Back on the Table. And “Cheap” Isn’t Good Enough This Time Around.

If you’re a fan of 1990’s movies, you will likely remember a scene in the Academy Award winning film, As Good as It Gets. The Washington Post described the ruckus in theatres:

Audiences in the Washington area have been erupting in whoops, whistles and applause when actress Helen Hunt, playing the single mother of a chronically ill child, denounces HMOs with a string of unprintable epithets.

As I’ve written before, the US is facing a major healthcare value crunch. HMOs are poised to re-emerge on the scene after being an object of scorn in the 1990s.

Despite their cost effectiveness, though, HMOs haven’t gained much traction in the market over the past five years. Here is a graph of HMO penetration in Massachusetts over the very dynamic 2010-2012 period.

Why is this? I’ve heard a number of theories.

I recently came across a great paper from the University of Rochester. It argues that the basic problem with HMOs was that lower HMO premiums could not compensate for the perceived loss in value of a narrower hospital network. Narrower hospital networks reduced the HMO plans’ value in the minds of consumers by a dollar equivalent of $62-$118 and the premium savings can’t compensate for this perceived loss of value.

The takeaway: selling HMOs exclusively on the basis of price can’t be a winning formula: there just isn’t enough slack in the system to make the math work.

My thoughts- HMOs need to improve their value proposition: Selling HMOs on the basis of cost alone won’t work. To grow, HMOs need to reposition themselves—not as a poor man’s insurance product, but as an integrated, predictable and convenient source of care.

I think consumers are ready for this proposition. In other industries, appreciation for coordinated services seems to be increasing. I was surprised to find that after decades of stagnation, the number of people taking package holidays has increased. Forbes recently noted that all-inclusive resorts are the fastest growing segment of vacation bookings, at the same time as the cruise industry has moved towards inclusive pricing.

What are these consumers looking for? it’s not rock-bottom pricing. If anything all-inclusives such as Club Med have gone up-market and this increase in amenities is drawing more buyers than ever before. Inclusive holidays are increasingly purchased by upper income buyers. These buyers want security, convenience, integration and predictability.

There’s a real opportunity for HMOs to thrive over the next decade, but it’s going to be all about reinvention and rebranding.

Here’s the video of the HMO scene from As Good as it Gets, including the string of unprintable epithets:

“Managing capitation can be deceiving. Like flying an airliner, the gauges, levers and controls can make it seem like high-stakes science. It is, partly. But as with all things healthcare this is ultimately about humans, their needs and their behaviors. You eventually learn that managing the payment model is as much an art as is the actual practice of medicine”.